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Edited Transcript of Cooperatieve Rabobank UA earnings conference call or presentation 13-Feb-20 1:00pm GMT

Full Year 2019 Cooperatieve Rabobank UA Earnings Call

Amsterdam Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Cooperatieve Rabobank UA earnings conference call or presentation Thursday, February 13, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bas C. Brouwers

Coöperatieve Rabobank U.A. - CFO & Member of the Managing Board

* Mirjam Bos

Coöperatieve Rabobank U.A. - Head of IR & Rating Agencies

* Wiebe Draijer

Coöperatieve Rabobank U.A. - Chairman of the Managing Board

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Conference Call Participants

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* Alexander Babulevich

* Jeffrey Berry

Fidelity Investments - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for holding, and welcome to the Rabobank Annual Results 2019 Call. (Operator Instructions)

I would like to hand over the conference to Ms. Mirjam Bos. Go ahead, please, ma'am.

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Mirjam Bos, Coöperatieve Rabobank U.A. - Head of IR & Rating Agencies [2]

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Thank you, and hello. Welcome, everybody, to the webcast and conference call on Rabobank's full year 2019 results. My name is Mirjam Bos. I'm Head of Investor Relations and Rating Agencies. And today, our CEO, Wiebe Draijer; and our CFO, Bas Brouwers; will present to you the 2019 results, will give an update on the progress on our strategy and also discuss some current developments. The presentation will take about 20 to 30 minutes, after which there will be sufficient time to take your questions.

I would now like to hand over the presentation to Wiebe Draijer.

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Wiebe Draijer, Coöperatieve Rabobank U.A. - Chairman of the Managing Board [3]

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Good afternoon, and thanks for dialing in. What I'll do is I'll quickly take us through the progress on our strategy that we set forth about 4 years ago and that we have reiterated recently for the coming 4 years and share with you some of the concrete progress that we've made. And then Bas will take us through the details of the financial results of 2019.

The strategic framework that we follow has been now widely shared in all of our communications and shared within Rabobank throughout the world. And the overall mission is to grow a better world together that underscores our cooperative nature, but also our purpose notion of being societally lit. We do that for the Netherlands, Banking for The Netherlands, and we do it in the world of food around the world. And under that, we have 4 main vision areas, but also where the strategic priorities are centered around: excellent customer focus, making sure that our digital service is optimal, that our clients can expect advice nearby, and that we innovate for them and with them; a meaningful cooperative that has a concrete contribution of societal topics and engages our membership; a rock-solid bank that is performing well, has a strong balance sheet and is in strong control in terms of risk and compliance; and empowered employees that fuel the one Rabobank sentiment and are engaged and motivated. And what I'll do is I'll quickly take you through each of these 4 to share with you some highlights of the progress made to underscore that the strategy works and that progress is being delivered.

When we look at the excellent customer-focused pillar, above all, and the simple indication of progress, is the appreciation of our clients, and because we've seen continued growth in that appreciation in all of our client segments be it corporate, private banking, private clients, but also in the wholesale domain internationally through the Greenwich scores that came in only last week, and they were again on record highs.

We've also seen that digital client service is a reality of our corporate clients but also in our private customers through the ever-increasing smoother service levels that we can offer digitally and the ever-expanding service on our app that -- through which we engage with our clients.

We have also launched a series of innovative products of which a few are listed here. But Fundr is maybe an interesting one to share, which is a digital funding platform or methodology for SME clients in which they can -- if they fill in the key financials and we can leverage their transaction data. We can offer them within 15 minutes clarity on whether they are fundable or not. Also, SurePay is a good example that now forms the foundation of many insurance features on payments by almost all banks in Netherlands and also now recently exported into the U.K. SurePay is on a healthy track to serve as a standard for insurance in the -- of who the payment is to in the financial industry. And we've also launched a number of others of these innovative frontiers.

Overall, I think we're well on track on our mission, but there's still a lot to be done, if you think ahead in terms of further digital services also offering a frontier that can match the innovative newcomers to the field, but also staying close to our core of advising our customers nearby, be it in the world of food or in the Netherlands.

If you look at the second pillar, meaningful cooperative. Really, this pillar starts with the understanding that we, in the end, are serving big shifts in society. And we've done that through a series of high-impact social projects around the world, not only in the Netherlands. But to just a name a few: the Farm2Fork conference, for example, in Australia, was a massive conference in which we engaged the whole food sector in Australia; the Food Loss Challenge in Asia, where we engaged clients on how they can reduce food loss in the chain; but also the Brainport Eindhoven initiative where we committed our whole bank to investing in innovation in the region -- with the stakeholder in the region. Rabobank Foundation went through its 45th birthday last year and has shown a track record of 45 years of serving the issue of self-reliance and sustainability in the food supply chain now reaching millions of farmers in Africa on important topics. The BPD, an example, there is a good one where we now step forward to build rental houses because there is a serious societal issue in the living environment in the Netherlands. And BPD is a daughter of Rabobank that can build these houses, and we keep them on the books for rental purposes and thereby alleviating a constraint in the housing market.

We have received front-runner status in sustainability initiatives and financing rating agencies, the first rating on ESG risk integration by Sustainalytics. And on a number of fronts, we have shown our footprint on sustainability. We are now a leading bank in the area of green finance, and that's also visible in terms of the share of our markets there.

Finally, and that's a cornerstone of our local cooperative contribution, is the dividend that we pay out; a share of our profits locally to participate in many, many small-scale local initiatives around the country in The Netherlands. All in all, I think we're making good progress. We have rejuvenated the cooperative direction last year, and we'll emphasize more of these societal themes in the years to come and engaging our members around them.

When you look at the rock-solid bank, no doubt a key interest area of all of you in this call, and Bas will share many more of the financial progress here. Let me just share a few highlights.

The purpose there is to strengthen our capital. And we've, again, increased our CET1 ratio over the last year with 0.3%, well north of our ambition of 14%, but a good basis from which to absorb some of the consequence of Basel IV. We have improved our cost/income ratio with about 2% in the last year. But if you look back to 2016, you can see a significant reduction, and this is the time horizon of this strategic period. And we are confident and aim to do so to further reduce these costs and the cost/income ratio in the years to come. And Bas will talk some more about the long-term objectives in that area.

And we've continued to deliver on our ambition to reduce our footprint in the balance sheet in areas that nonstrategic with the sale of, also in the last year, of our retail bank in California, the ongoing reduction of our ACC portfolio and also our retail bank in Indonesia. All in all, I think we've delivered on many of these objectives, but there's also here yet a lot to be done in the face of the lower interest rate environment. And we are going to continue on that path in the years to come.

Finally, when we look at empowered employees, those people working and giving their best for Rabobank. And with Rabobank, our aim was to create an environment that fuels as one Rabobank in which they are motivated, and you can see we track this on a quarterly basis since 2017 through an engagement score. And this is -- our score is strongly up in the last year despite the massive changes that we've undergone as a bank internally. And we take pride in these scores, but we are also very happy with the support of our people in what we're doing and how they're involved.

We've also made great strides in our diversity, where now we have a top team of 40% women, both the supervisory board and the managing board. And also in the layers below the board, where 1/3 of our top talent is female. We've made a priority this year of addressing also the cultural diversity in many fronts, and I'm hoping to achieve a similar progress against those targets, as we set with the male-female diversity, but this is a more hard-fault issue to fix.

And when we look at the attractiveness of Rabobank as an employee -- as an employer, sorry, we have again reached a number of good indicators that we're well on track, particularly in the area that's so important for a bank these days; in attracting talent for IT and developmental purposes, where we are now already the most attractive bank to work for in The Netherlands. We've also invested greatly in the vitality of our people despite the changes that we live in. And as one of the scores in the engagement survey, you can see that 85% of our employees enjoy going to work when they travel to and from Rabobank.

All in all, I think we're making real progress on our strategic objectives, but we have said that this framework is still highly relevant for the years to come. And when you look at the years to come, there are at least 6, if not more, but these are core challenges that the industry is facing and that we're also part in. First of all and strongly visible in the results today and maybe in the years to come, is the low interest rate environment, the macroeconomic uncertainty that has affected some of our credit reserves under the new rules that are applicable there, but also the important role that we have as a gatekeeper to the financial system with our BSA/AML requirements, where we are now working with around -- almost 3,000 people, 2,800 in total, around the world, trying to, on the one hand, fulfill the needs and requirements of this from a regulatory point of view, but more importantly, in the long run, collaborating with other banks and also the public sector domain to chase some of the money laundering away from the economy in which we operate. We look ahead with great confidence in that area of collaboration, but we still have a lot of work to do to make sure that we fulfill the basic requirements in this area, and this is one of our top priorities.

On the area of digitalization, and by the way, on the last part, we did -- we are working against a specific enforcement action by the regulator to fulfill all this -- for this gatekeeping role by April 1 of this year. And that is one of our top priorities. On digitization, the world is being disrupted on an ongoing basis in the financial area. We see that as a chance and opportunity to participate ourselves, and we've done so in many ways in the last years. And then there's obviously the climate stress that the world is facing. In the world that we work in as a bank, Australia facing significant droughts and fires, our clients being affected. But on the whole, it has not affected the bank's position in those clients, but it is crucial to the lives of these clients. And the role that we play for them is important as partners. But also the impact that we face in the Netherlands, when it looks -- when you look at the rural or the agricultural sector that was really on lock down in the last year because of nitrogen issue and regulation to reduce the footprint in the country. We are the partner of that sector, and we continue to work with them to address these issues. And finally, but not least, regulation and regulatory requirements. And as you will see in the CET1 ratio developments, that is also partly in preparation of the consequence of Basel IV.

Bas, can I give the floor to you at this point, I'm hoping to not have lost the audience with my turbine speed?

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Bas C. Brouwers, Coöperatieve Rabobank U.A. - CFO & Member of the Managing Board [4]

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Okay. Thank you very much, Wiebe. I will let you through the 2019 financial performance of the bank. But before I will do that, I would like to provide you an update on 2 topics, mainly our financial ambitions going forward as well as on our guidance with respect to Basel IV.

So let's first have a look at our financial ambitions. As today, we announced an update on our financial ambitions. On the one hand, we maintain our financial ambition for the longer term. And at the same time, we also set short-term ambitions for 2022. And therewith, we strike a balance between realism and ambition.

The continued low rate environment, combined with increased investments in digitalization and our regulatory agenda, amongst others, compliance, AML, CDD related but also the nonprudential measures, like TRIM, the DNB macro-prudential measures on mortgages and the prudential backstop, have resulted in a change on our ambition for cost income and return on equity. And we leave our common equity Tier 1 ambition unchanged at, at least 14%.

Having a look first at the CET1 ratio ambition. When we look for '22, please remember that it now includes the first year impact of Basel IV after its expected implementation in that year and also includes the impact of the prudential measures I mentioned before. It's important to note that these measures effectively are an earlier implementation of Basel IV, and hence accelerated Basel IV impact. So it's not an add-on to the ultimate impact that we expect from Basel IV. The fully loaded Basel IV CET1 ambition at over 40% is expected to be met halfway during the transition period.

Our cost/income target for 2022 is low 60s. And you will recall from last year that we already indicated that our original 53%, 54% cost/income ratio ambition for '22 -- for 2020 was already out of reach. The now announced 60% or low 60s shorter-term ambition, takes into account the expected low rate environment for the coming years, but also the continuing strategic investments in future-proofing our bank. Having said that, we will, of course, continue our cost reduction efforts and focus on the continuous improvement of our core. The longer-term ambition for our cost/income ratio of mid-50s is close to the original targets, but there I must say that reaching the target is conditional upon a normalization of the interest rate environment.

And I think in this respect, it's good to realize that our cost/income ratio includes the regulatory levies and that overall impact on our numbers is around 400 basis points, which is relatively high compared to other jurisdictions in Europe, and that's mainly related to the banking tax in the Netherlands that's still applicable.

Well, as a consequence of the same reasons I mentioned -- I just mentioned, the ambition for our return on equity is in the range of 6% to 7% for the next period. And there, we aim to apply a return ambition that is stretched but also reflects the current and expected operating conditions. And also good to realize here is that due to the additional capital that we built in anticipation of Basel IV negatively affects our return on equity. In the longer term, the return on equity target of over 80% (sic) [8%] still stands. But here are the same condition as for cost/income ratio that's based on the normalization of the interest rate environment.

On the next page, we have a look at our update on our Basel IV expected impact. Up until today, we communicated a Basel IV impact of a range between 30% and 35%, so an increase in our RWAs, and that's before mitigation. And after mitigation, we already announced that we would not expect an impact over 30%. So it would be below 30%. And now our estimate has been lowered to a range of 25% to 28%, and that reduction is actually due to 2 reasons. The first one is the inclusion of the estimated impact of CRR2 because it now incorporates the extension and revision of the SME support factor, which is a positive impact on our RWA inflation. And we already absorbed higher risk rates already in our 2019 numbers, resulting from model changes mainly for operational risk. And by this change, we have already absorbed the expected Basel IV impact for operational risk. Again, the mitigation measure still exists, and that makes us comfortable that the ultimate impact will be below 25% compared to the below 30% that was earlier disclosed. And of course, here, until the implementation of Basel IV in 2022, further changes to our expected impacts could be possible as a result of the European Commission approval process and further regulatory developments and measures.

So now have a look on the next slide. Our performance in 2019 is compared to the updated financial ambitions. Our CET1 ratio landed at 16.3%, well above the 14% ambition. And the increase of 30 basis points we've already alluded to compared to 2018 is the net effect of an increase of 1 percentage point due to retained earnings and the divestment of RNA, and that 1% plus was actually dampened by an increase in RWAs due to the operational risk increase that I just mentioned and also from the business growth that we wrote in 2019. And with a 2.3 percentage point buffer over the 14% ambition and considering the downward revision of Basel IV impact I just mentioned, we remain well positioned to absorb the impact of Basel IV, TRIM, DNB measure and the prudential backstop and to also provide us some room to further grow our business. You see a further decrease of our cost/income ratio to 63.8%, and that is despite the continuous impact of the low rate -- the low interest rates on our results. And last but not least, due to the lower net profit in 2019 compared to last year, you see a drop in our return on equity from 7.3% last year to 5.3% this year.

Well, this brings me to the next slide, where you see our net profit development over the last 4 years. In line with our first half year results, the overall results of EUR 2.2 billion for 2019 is clearly below the record level that we achieved in 2018. It's a decrease of 27%. And for the most part, this resulting from normalized impairment charges, which after a period of 3 years being ultra-low actually came back to the normal efforts that we have seen in a further history. We saw the first signs of the return to normalized levels already in the second half of 2018, and this trend has continued throughout 2019, and that led to an ultimate increase year-on-year of nearly EUR 800 million.

Next to the development of impairment charges, we saw that income was still relatively stable. Net interest income was only modestly impacted by the low interest rates. We see a slightly higher fee and commission income, and we saw that foregone income due to divested businesses over the last 2 years were compensated by the sales results of RNA. Overall, expenses nicely decreased, driven by our continuous cost containment measures.

And now I would like to have a look at our underlying profit that's visible on the next slide. But before we look into the graph, let's have a look at the, what we call, exceptional or special items. We identified 5 items in the figures of 2019. The first one is a regular one. It's the negative contribution of fair value items, which stem from imperfections in hedge accounting. The second one, already mentioned, was the gain, the sales result on RNA. The third one being the addition to our provision for the interest rate derivatives framework. We are approaching at the final stage of completing this legacy file, and the additional costs mainly relate to legacy interest payments to our clients, given the delay in paying out compensation amounts. Here, I think it's good to know that all our clients got a final offer before the end of 2019. So this year will be, let's say, the finalization of getting everything dealt with. And then we hope to close the file finally in the course of this year.

The fourth item that you see here is the restructuring costs, actually an ongoing item, this time related to the implementation of our new operating model in the Netherlands and the phasing out of our real estate activities that you already heard earlier in this call.

The fifth one, that's a new one, an impairment of our 30% equity stake in Achmea, the insurance company. Maybe some additional background here. This is a technical noncash impairment of EUR 300 million. The sustained low interest rate continues to negatively affect companies in the European insurance sector, which includes Achmea as well. And this financial environment is having an adverse effect on Achmea's businesses and its results. And therefore, this development triggered the assessment of the value of our investments. Now the test to establish whether potential impairment had occurred resulted in a downward adjustment of the book value to around EUR 1.6 billion.

Well, if you add up all these amounts, we arrived at a number of around EUR 250 million, which is around the same amount that we saw last year that negatively contributed to our P&L. And if you would correct for that, and that's feasible in the graph with the orange color, you arrive at the underlying profit before tax. If we also showed the delta in our credit impairments because the delta was relatively big for this specific item, and that's here visualized in the light blue color, you can conclude that the underlying growth performance, so total income minus total costs, decreased with 3%. And this 3% reduction is fully due to the deconsolidation of some of our divested activities over the last 2 years.

So the next 3 slides, I will go into somewhat more detail of the main items of our profit and loss accounts. First, have a look at our top line. Before we do that, I think, in general, it's good to realize that over the last 4 years, our asset base has become much smaller due to our noncore asset divestment program which can, I think, today, be considered as done. At the end of 2015, the balance sheet total of our bank decreased with almost EUR 90 billion. And that was due to some major disposals, the most famous one, I think, are Athlon; our commercial real estate bank, FGH; but also BPD France, SSA and retail activities in RNA, Indonesia, Ireland, so there have been quite some divestments over the last couple of years. And I think now we can conclude we are back to the core of our bank. But of course, the smaller asset base has also an impact on the income developments over the last couple of years.

Underlying, our total income was down by 4%, mainly due to other results, and that's exactly the reflection I was just referring to. 2018 compared to 2019, you see that in our 2018 numbers, we still have the, let's say, regular results of BPD France, but also the book profits on a sale that we accomplished last year. And also 2018 consisted of the, let's say, commercial real estate income activities as we still had FGH and ACC in our books. The loss of these businesses, of course, have the impact, and that's mainly visible in the other income components.

Another impact of the lower order income is the difficult market conditions, especially in the first half of 2019 for our markets division. That's what we already disclosed half a year ago. But also our corporate investment division had a smaller results as compared to last year. That was a kind of record year for that specific business segment.

When we look at net fee and commission income, we see that it was a slight increase, and that's perfectly in line with our ambition to generate more noninterest income. But this grows slowly, and we saw the increase, especially in the Netherlands for our payment services, and also we sold more insurance -- more insurances to our clients and also DLL contributed with higher fees. So our leasing business.

For our net interest income development, I would like to switch to the next page. Because they are maybe so much surprisingly, the very low interest rate environment only had a limited impact on our net interest income so far, which declined by only 1% compared to 2018. The margin increase on also mortgages in the Netherlands, but also higher lending volumes in our international business, wholesale, rural but also leasing, almost fully compensated the impact of the continued low interest rate environment on our net interest income. But I think it's obvious that the sustained level of -- low level of interest rates is specifically affecting our margins on our savings and current accounts, and these liabilities practically led further repricing potential by maintaining the 0% as the floor for our private clients and most of our business clients in 2019.

And I think in this respect, it's important to note that as announced earlier this week, within the next few months, we will start offering negative rates as of the EUR 1 million threshold for both our private and business clients. And herewith, we follow the approach taken by 2 other main banks in the Netherlands.

The next slide shows our cost development over the last 4 years. Also here, a decline of also -- yes, also a decline of 4%, like we saw with our total income development. And also here, this decline has been, let's say, impacted by the reduced footprint of our bank as well. But staff costs still on a downward trend, minus 1%, mainly due to the further transformation of our domestic operations, but also despite an increase in our headcount during the year. And that's actually a different development as we have seen over the years before. Because after a couple of years of strong reduction of our workforce year-on-year, we saw an increase of around 500 employees in 2019. And this is the result of the -- on the one hand, ongoing restructuring efforts and the divestments that we did internationally. But on the other hand, we are hiring additional staff related to our regulatory agenda, mainly CDD and AML related. We saw business growth, a DLL rural and wholesale. And we keep on investing in our digital ambitions, and that also asks an additional workforce to be needed in our IT departments.

But the underlying other operating expenses reduced by 11%, and this is partly due to the absence of negative revaluations of property in our use, and we also saw lower project expenses in connection with the derivative framework because that's coming to an end now. All in all, this was the main reason for the drop in our cost/income ratio to 63.8%. And again, if we would exclude the regulatory levies from this ratio, we would be below 60% this year -- at the end of this year.

On the next slide, we take a somewhat longer historical view and look at our lending portfolio development for 3 of our main business lines: domestic retail banking, wholesale and rural, where we split the portfolio in 2 pictures and also leasing -- our DLL, our leasing business.

And what you see here that over the last 6 years, starting with DLL on the right corner on the top, the business has been growing by over 50% in the last 6 years. And also 2019 fitted actually quite nicely in this steady trend with an increase of the portfolio of EUR 2 billion. And going forward, we see further growth opportunities in offering pay-per-use financial solutions as customers are increasingly focused on equipment usage over traditional ownership. So also the future perspective for further growth is clearly visible here.

Our rural portfolio growth in total of over 40% over the last 6 years. And as you know, we are present in, actually, the main agricultural areas in the world, Australia, New Zealand, South America and North America. And you see an add-on, the light blue part that had to do with the integration of our agri assets that we maintained in RNA. We only sold the retail activities but we kept the agri business and that's what's integrated with our existing business in the U.S.

The wholesale portfolio, left corner on the bottom. An increase of close to 30% over the last 6 years. But what's clear from the trend is that the composition of this portfolio is steadily changing in favor of food and agri-related lending, and now that stake is above 50% of the total portfolio, and the growth of the other part of the portfolio was mainly achieved by our Dutch wholesale business. And these 2 developments actually nicely showed the impact of our international Banking for Food strategy in combination with a strong domestic footprint, which we call, Banking for The Netherlands.

That leaves us with the development on the left corner at the top end of the page, our domestic retail banking businesses, and there you see a decline of our overall portfolio. But this, to a large extent, the result of active portfolio management. I think most of you will recall that we have been downscaling our exposure to commercial real estate, and that has been accumulating to over EUR 10 billion over the last couple of years, and we have now a total exposure left of around EUR 20 billion. The mortgage book was partly managed by whole loan sales. Since 2016, we have been selling a total of EUR 8 billion of our total mortgage book. And on top of that, we still see a higher level of prepayments by our clients which is, of course, linked to the very low interest rates that clients receive on their savings accounts.

I think in this respect, it's also good to mention that our appetite for new mortgages is still there. And also in 2019, we kept our market share for new production at around 21%. And as we have now the flexibility to originate and distribute, we have a strong appetite for producing mortgage just also in 2020.

Maybe from a risk angle, if we look at this historic development, it's also interesting to see that the LTV of our total book at the end of 2012 was above 80%. And that's, over the last couple of years, the number has come down to 60%, which is partly due to increased prepayments of our clients, but also to the increase in-house prices. But at least it's good for the risk profile of our portfolio to see this percentage coming down.

The next slide shortly zooms in on the year-on-year development. On the left bar represents the total of our lending book, but I will not go into details anymore because that is the reflection of the developments I just discussed. So in total, an increase of our lending book, if we would correct for the divestment of RNA of EUR 6 billion. The other bar represents our total outstanding of our total deposits that we get up from our clients, an increase of EUR 11 billion. And that increase was achieved in the Netherlands, where we're actually growing in line with the total market size, and we kept our market share of 1/3. So 1/3 of total Dutch household savings, SME savings is kept within our bank, and that number did not change last year.

Then we move on to our development of the impairment charges, well, as I said, the main, let's say, reason why our profit was so much down compared to last year. Actually, what you see here is that the impairment charges are trending down to the -- through the cycle level of 20, 25 basis points, which is kind of the average. And we see also the big deviation from the exceptional levels that we saw in 2016, '17 and '18. And the year-on-year comparison makes that the total impairment charges have increased by nearly EUR 800 million. And I think it's good to mention 2, let's say, reasons for this deviation. Around 40% is what you could call IFRS 9 driven that is we see higher stage 1 and stage 2 provisioning levels due to a less optimistic scenario that we apply for the future. And the other part is, let's say, more specifically related to the development of our portfolio.

In the Netherlands, impairment charges remained still historically low due to the continued, let's say, good shape of the Dutch economy. The higher level was especially seen in the international environment, the wholesale and rural business line, where impairment charges were doubling from EUR 300 million last year to over EUR 600 million this year. And the main reason for this elevated number next to the general IFRS 9 impact can be explained by several nonrelated large defaults in Europe. So a couple of names with a -- well, material impact on the total number. We still feel the impact of the sugar/ethanol sector that was actually the same as we already saw when we disclosed our first half year results, still suffering from big commodity prices, although lately, the prices for sugar are somewhat recovering. And finally, we saw a somewhat higher level of impairment charges or reservations for our U.S. agri business, low commodity prices, especially in the first half of the year, but also an export that had to deal with lower demand, which is partly due to the trade war but also record production levels in major export countries for the U.S.

So that was all about our P&L. Now look at the, let's say, somewhat more details for our capital development. Here, you see the 30 basis points increased split of the different components, while the green parts, I already mentioned, profit retention and the impact of the sale of RNA. RWA increased. Again, operational risk ratings have increased to the Basel IV levels. And what you also see in this slide is a 20% decrease that has to do with capital securities that we buy back. Those securities have been issued in mainly U.S. dollar, and the negative FX impact of this buyback is directly impacting our common equity Tier 1 ratio. That explains the increase to 16.3% over the last 12 months.

On the next slide, you see the part of the profits that we pay out to our equity providers, our Rabo certificate holders and our holders of AT1 instruments. And there you see the trend that is actually continuing, that by recalling more expensive instruments, replacing these instruments with more beneficial instruments, we are actually partly also benefiting from a low rate environment with very small credit spreads because that's -- let's say, from the total amount that we have to pay on these instruments that's beneficial for us and also good to realize that in the EUR 862 million that we paid out over 2019, EUR 133 million is connected to instruments that we called during 2019.

The next slide shows our total MREL requirements. In 2019, we received an updated binding requirement, which corresponds to a 28% plus percentage of our risk-weighted assets. And as you know, we intend to meet our MREL requirement fully with a combination of own funds and subordinated instruments and NPS. But also, if we take our, let's say, strict definition, we are already covering the requirement today. If we would also include preferred senior in our MREL stake, which is still eligible in the current regulation, you see that we are already way above our current requirements. And it also makes the necessity to issue NPS in the next couple of years is relatively limited.

And that brings me actually to our total, let's say, funding position. Before looking at our issuance levels over the last couple of years, could realize that our total outstanding amount of wholesale funding is EUR 152 billion, coming down by around EUR 50 billion since 2015. And this is EUR 50 billion. This is actually a number that is exactly in line with the target that we set at that time. So we said we want to be around EUR 150 billion. Well, that's what we met these days. So if you look over the last couple of years, we did not only bring back the total amount of funding, but we also further diversified our funding base with the issuance of Green Bonds in 2016 already, the launch of our Covered Bond program in 2017 and also the issuance of NPS in 2018. And those instruments have also extended our maturity profile. And today, I would say we are comfortable with the wholesale funding level of around EUR 160 billion, considering the additional maturities and the additional diversification that we have achieved.

For 2020, our funding needs will be relatively limited. I expect a number between EUR 12 billion and EUR 15 billion. And of this EUR 12 billion to EUR 15 billion, around EUR 3 billion to EUR 5 billion is going to be met by issuing NPS and the rest mainly by preferred senior instruments.

That's where I would like to leave it with, wrapping up with just one, let's say, slide, and then we will open the floor for questions before Wiebe was -- then we open to the floor for questions. I think where we started with, and Wiebe was alluding to that, well. We, of course, a part of the banking industry facing the same challenges that we see for the whole financial sector. Our net profit of EUR 2.2 billion actually completely caused by higher impairment charges compared to last year, a relatively stable net interest income with a growth in net fee and commission income. Due to our cost reductions, we could improve our cost/income ratio to close to 64%. And we can conclude that we have more or less finished our divestment program of noncore assets. Our common equity Tier 1 ratio, well positioned to absorb the coming Basel IV impact, and the client businesses was positive in the sense that our lending book grew by EUR 6 billion, and our deposits grew by EUR 11 billion.

And therewith, I would like to give you the opportunity to ask questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Mr. Jeffrey Berry, Fidelity.

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Jeffrey Berry, Fidelity Investments - Research Analyst [2]

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I'm interested in understanding what your expectations around loan growth in the wholesale book are over the next 2 years. When looking at the 6% to 7% ROE ambition and given the amount of growth that you had this year once you strip out the disposal in North America. I'm just wondering if you expect a similar level of growth going forward or if there are other levers that you're looking at there? And then I have a follow-up question after that, if I may.

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Wiebe Draijer, Coöperatieve Rabobank U.A. - Chairman of the Managing Board [3]

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Should I quickly answer that one? We do -- we have no very specific or concrete expectation but very much in line with the historic developments over the last year. If you would do the math a little bit on the numbers that we have shown you on the slide that Bas presented, where you see the growth of our wholesale portfolio and the rural portfolio, I think we've shown for 6 years in a row roughly 7%-ish growth in our strategic area of food, a slightly higher growth rate that is in the food rural domain than it is in the wholesale domain. So put it all into the hopper and you have at least our optimistic outlook on the continued growth in our strategic area of F&A in the world of food.

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Jeffrey Berry, Fidelity Investments - Research Analyst [4]

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Right. And then just to sort of understand the different pieces of regulatory capital inflation that are coming over the next year or 2. Is the greater than 14% CET1 ambition sort of throughout all points of the next 2 years? Or is that sort of the ending point that you decide to get to? I guess, I'm just trying to understand the magnitude of different changes that will happen between now and 2020.

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Bas C. Brouwers, Coöperatieve Rabobank U.A. - CFO & Member of the Managing Board [5]

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Yes. Thank you. Well, you can consider that as the number that we have as our, let's say, base case based on current regulations. Of course, we follow what's happening. We all know that there are some discussions related to Basel IV, how to count with pillar 2 requirements, systematic risk buffers in relation to the RWA inflation that already comes from Basel IV. Also, EBA, ECB is making comments that we should prevent double counting. So in that sense, we are very interested to see what will happen at the end of this, let's say, this discussion.

Are we going to be helped by a reduction of our systematic risk buffer? Yes and no, who tells? I don't know yet. For now, we do not anticipate on a more favorable situation. If a more favorable situation is going to happen, we might be considered the ultimate target that we set for ourselves. But for now, base case planning is based on the numbers I just described.

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Operator [6]

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(Operator Instructions) The next question is from Mr. Alexander Babulevich, PGIM.

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Alexander Babulevich, [7]

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Just a couple of questions, one on SREP. So will you be using the proposed Article 104a changes to reduce the CET1 portion of the SREP requirement? And just a quick follow-up. Second question is have you seen any impact of bushfires in the Australian agri business?

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Mirjam Bos, Coöperatieve Rabobank U.A. - Head of IR & Rating Agencies [8]

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Maybe I'll take the one on the 104 article. Yes, we follow the developments. But we did not, let's say, anticipate on any change yet. But of course, we will see what's going to happen. Formally speaking, we are allowed or it seems that we will be allowed to apply those rules. But also it's up to the discretion of a local regulator, whether that would be allowed for an individual bank, yes or no. So we are not in talks with our regulator on this specific topic, but we will keep an eye on it.

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Wiebe Draijer, Coöperatieve Rabobank U.A. - Chairman of the Managing Board [9]

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With respect to the -- thank you for the question about the bushfires in Australia, which obviously concerning from a global perspective, a local perspective, but more importantly, individual client perspective. We are not seeing any impact of those fires on our book. The financing of our agricultural business in Australia has done very conservatively. And so far, a few clients have been affected personally and as a profession by the fires, but it has no impact on our book up to this point. We do obviously look ahead in terms of the climate change and drought consequences, and even those are within the bandwidth of our models so far. But if they prolong, there will be a point when it starts to affect the portfolio.

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Operator [10]

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(Operator Instructions) There are no further questions. Ms. Mirjam Bos, back to you, please.

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Mirjam Bos, Coöperatieve Rabobank U.A. - Head of IR & Rating Agencies [11]

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Okay. Thank you all. I think that concludes the call for today. I would like...